Taxation Notes 02-08-23

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FEBRUARY 08, 2023 TOPIC

GENERAL PRINCIPLES

Taxation - Taxation is the process or means by which the sovereign (independent State), through its law-making
body (the legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising:
revenues to carry out the legitimate objects of government.

ASPECTS OF TAXATION
Aspects refer to “stages or phases” that are included or embodied in the term “taxation” such as:
1. Levying - creation of tax laws which will be done by the legislative body of the government
2. Assessing - determination of tax to be paid by the taxpayer.
3. Collecting – collection of tax due

PURPOSE OF TAXATION:

Primary: Revenue or Fiscal Purpose


To provide funds or property with which to promote the general welfare and the protection of its citizens and to
enable it to finance its multifarious activities.
Secondary: Regulatory Purpose (or Sumptuary/Compensatory)
a) Promotion of General Welfare
b) Reduction of Social Inequality
c) Economic Growth

THEORY and BASIS OF TAXATION


1. Theory (Authority)
NECESSITY THEORY - The power of taxation proceeds upon the theory that the existence of government is
necessity.
LIFEBLOOD THEORY - Taxes are the lifeblood of the government their prompt and certain availability is an
imperious need.
2. Basis of Taxation
RECIPROCITY THEORY - The State collects taxes from the subjects of taxation in order that it may be able to
perform the functions of government. The citizens, on the other hand, pay taxes in order that they may be secured in
the enjoyment of the benefits of organized society.
BENEFITS RECEIVED - Taxpayers receive benefits. from taxes through the protection the State affords to them.
For the protection they get arises their obligation to support the government through payment of taxes.

SCOPE of the Power to Tax


a) Comprehensive - as. it covers. persons, businesses, activities, professions, rights, and privileges.
b) Unlimited - In the absence of limitations prescribed by law or the constitution, the power to tax is
unlimited and comprehensive. Its force is so searching to the extent that the courts scarcely venture to declare that it is
subject to restrictions.
c) Plenary - as it is complete; the BIR may avail of certain remedies to ensure collection of taxes.
d) Supreme - in so far as the selection of the subject of taxation.

ESSENTIAL ELEMENTS OF TAX


a. It is an enforced contribution. Payment of tax is not voluntary payment or donation, but an enforced
contribution, exacted pursuant to legislative authority.
b. It is generally payable in money. It is a pecuniary burden payable in money which must be in legal tender.
c. It is proportionate in character. Payment of taxes should be based on the ability to pay theory or theoretical
justice. The use of a graduated tax rates is in consonance with this rule.
d. It is levied on persons, property, or the exercise of a right or privilege (subjects or objects of taxation).
e. It is levied by the law-making body of the State. The power of “imposing” a tax, being purely a legislative
function. Congress cannot delegate such power. This limitation arises from the doctrine of separation of powers
among the three branches of the government.
f. It is levied for public purpose.

INHERENT POWER
(3) Inherent Power of the State:
1. Police Power. It is the power of the State for promoting public welfare by restraining and regulating the use
of liberty and property. It may be exercise only by the government. The property taken in the exercise of this
power is destroyed because it is noxious or intended for a noxious purpose.
2. Power of Taxation. It is the power by which the State raises revenue to defray the necessary expenses of
the government.
3. Power of Eminent Domain. It is the power of the State to acquire private property for public purpose upon
payment of just compensation.

NATURE/CHARACTERISTICS of the State’s Power to Tax


It is inherent in sovereignty.
-The State, having sovereignty, can enforce contribution (tax) even in the absence of a constitutional
provision.
It is legislative in character.
-The power to tax (levying or imposition) is peculiarly and exclusively legislative in nature.

LIMITATIONS ON THE STATE’S POWER TO TAX


1. Inherent limitations
a. Purpose must be public in nature - the reason of the State in imposing tax is to defray the necessary
expenses of the government, it must be for public purpose. “The reason for this is simple. The power to tax exists
for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public
purpose.”
b. Prohibition against delegation of the taxing power - generally, the power to impose tax is legislative
in nature. Only the congress may impose tax.
c. Territorial limitation - tax laws will only be effective within the jurisdiction of the taxing authority.

2. Constitutional Limitations
a) Due process of law
b) Equal protection of laws
c) Rule of uniformity and equity in taxation
d) Prohibition against imprisonment for non-payment of “poll tax"
e) Prohibition against impairment of obligation of contracts
f) Prohibition against infringement of religious freedom
g) Prohibition against appropriation of proceeds of taxation for the
h) use, benefit, or support of any church
i) Prohibition against taxation of religious, charitable and educational entities
j) Prohibition against taxation of non-stock, non-profit educational
k) institutions.
l) Others:
▪Grant of tax exemption
▪Veto of appropriation, revenue, tariff bills by the President
▪Delegated authority of President to impose tariff rates
▪Non-impairment of the Supreme Court (SC) jurisdiction
▪REVENUE BILLS shall originate exclusively from the House of Representatives
▪Infringement of press freedom
▪Revocation of Tax Exemptions

INCOME TAX FOR INDIVIDUALS


Individual Taxpayers are natural persons with income derived from within the territorial jurisdiction of a taxing
authority. Under RA 8424, otherwise known as the National Internal Revenue Code (NIRC), also known as the Tax
Code, as amended, individual taxpayers are classified as follows:
1. Resident citizens (RC)
2. Nonresident citizens (NRC)
3. Resident Alien (RA)
4. Nonresident aliens (NRA)
*Engaged in Trade (NRAET)
*Nonresident aliens not engaged in Trade or Business (NRANET)
*Alien individuals employed by POGOs and/or OGLs

Resident Citizen (RC)


The 1987 Philippine Constitution considers the following as Filipino citizens, to wit:
1. Those who are citizens of the Philippines at the time of the adoption of this Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon
reaching the age of majority; and
4. Those who are naturalized in accordance with law.
Non-Resident Citizen (NRC)
A Filipino citizen can be considered as non-resident citizen in any of the following situations:
1. He establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a
definite intention to reside therein.
2. He leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
3. He works and derives income from abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year. Most of the time means being outside Philippines for not
less than 183 days in a particular taxable year.
4. He has been previously considered as nonresident citizen and arrives in the Philippines at any time
during the taxable year to reside permanently in the Philippines. He shall be treated as a nonresident citizen for the
taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the
date of his arrival in the Philippines.

Resident alien (RA)


All foreign individuals are considered alien if they do not possess any of the qualifications enumerated in Art.
IV, Sec. 1 of 1987 Philippine Constitution.
“The term “resident alien” means an individual whose residence is within the Philippines and who is not a
citizen thereof.”

Non-resident alien (NRA)


Non-resident alien means an individual whose residence is not within the Philippines and who is not a citizen
thereof.
A non-resident alien may either be engaged in trade or business (ETB), or not engaged in trade or business
(NETB).
“A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of
more than one hundred eighty (180) days during any calendar year shall be deemed a nonresident alien doing
business in the Philippines.

APPLICABLE INCOME TAXES AND TAX RATES


Generally, there are only three (3) types of income tax, namely; (1) basic income tax or regular tax, (2) final
withholding tax (FWT) on certain passive incomes, and (3) capital gains tax (CGT). The applicable taxes for
individuals depend on several factors such as but not limited to:
⮚ Classification of the taxpayer
⮚ Source of income
⮚ Type of income

Classification of the taxpayer


It is important to properly classify individual taxpayers because resident citizens are taxable on their income
derived from sources within and without the Philippines while other taxpayers are taxable only on their income
derived from Philippine sources. Moreover, individual taxpayers classified as nonresident aliens not engaged in
trade or business (NRANETB) are taxable based on their “gross income” while others are taxable based on “net
income.”

Computing the taxable income


After determining as to what classification, a particular taxpayer belongs, the next thing to consider is what
income will be included in the computation. Use the table below (Table 1) as your guide.

Taxpayer Tax Base Source of Taxable Income

RC Net Income Within and Without


NRC, RA, NRA-ETB Net Income Within

NRA-NETB Gross Income Within

Note: If the taxpayer is a non-resident alien not engaged in trade or business (NRA-ETB), his gross income,
within, will be considered as his taxable income.

TYPES OF INCOME
For income taxation purposes, the three (3) types of incomes subject to income tax are as follows:
▪Ordinary or regular income.
▪Passive income derived from Philippine sources; and
▪Capital gains subject to capital gains tax
Ordinary or regular income refers to income such as compensation income (salaries or wages), business
income, income from practice of profession, income from sale and/or dealings of property and miscellaneous
income and passive income other than those subject to final taxes and capital gains tax of the Tax Code, as
amended. Regular incomes are subject to graduated tax table (also known as basic or normal tax) as provided for
under Section 24(A) of the Tax Code, as amended.

Passive Incomes subject to Final Withholding taxes (FWT) are certain passive incomes from sources within the
Philippines as enumerated under Section 24(B) and 25(A)(2) of the Tax Code, as amended. These passive incomes
are not subject to graduated tax rate basic tax.

TRAIN LAW
On December 19, 2017, President Rodrigo R. Duterte signed into law Package 1 of the Comprehensive Tax
Reform Program (CTRP) also known as the Tax Reform for Acceleration and Inclusion (TRAIN) as Republic Act
(RA) No. 10963. The Law took effect on January 1, 2018.

The TRAIN aims to make the Philippine Tax System simpler, fairer, and more efficient to promote investments,
create jobs and reduce poverty. Along with this objective, the CTRP also aims to raise revenues that will fund the
President's Build, Build, Build Project that will sustain high and inclusive growth of the country; and finance
investments in our people through enhanced education, health and social services.

❖ CHANGES ON PERSONAL INCOME TAX

Change in the tax Schedule


RA 10963 restructures the personal income tax (PIT) schedule, with separate schedules for compensation
income earners (CIEs), purely self-employed individuals and/or professionals (SEPs) whose gross sales or gross
receipts and other non-operating income do not exceed the Value-Added Tax (VAT) threshold of P3 million and
mixed income earners.
Old Tax Schedule

New Tax Schedule


Other Reform:
⮚ Reduces the number of tax brackets from 7 to 6;
⮚ Exempts the first P250,000 annual taxable income of taxpayers;
⮚ Sets the highest amount of taxable income at more than P8 million and subjects it to a higher marginal rate
of 35%,
⮚ Repeals the provision on basic personal and additional exemptions and premiums paid on health and/or
hospitalization insurance which are deemed integrated into the P250,000 exempt threshold;
⮚ Retains the income tax exemption of minimum wage earners,
⮚ Retains the exemption from tax of de minimis benefits as well as the non-taxabilty of mandatory
contributions such as those made to the GSIS, SSS, PhilHealth, Pag-IBIG Fund and union dues
⮚ Increases the amount of tax-exempt benefits celling (13th month pay and other benefits) from P2,000 to
P20,000,
⮚ Imposes a 20% final tax on PCSO and lotto winnings exceeding P10,000;
⮚ Removes the preferential tax rate of 15% for employees of regional or area headquarters, regional
operating headquarters, offshore banking units and petroleum service contractors and subcontractors;
⮚ Increases the fringe benefits tax (FBT) rate From 32% to 35%; and
⮚ Inserts a provision that the Optional Standard Deduction by a general professional partnership (GPP) may
only be availed once, either by the GPP or the partners comprising such partnership.

❖ CHANGES ON ESTATE TAX

Change in Tax Rate


RA 10963 simplifies the estate tax schedule, from six bracket schedule with rates ranging from 5% to 20%, to
single rate of 6% based on the value of net estate:

Changes on the computation of Estate Tax:


▪Removes the deductions from gross estate pertaining to actual funeral expenses or 5% of the gross estate,
whichever is lower; judicial expenses; and medical expenses but increased the amount of standard deduction from P1
million to P5 million;
▪Increases the amount of deduction for family home from up to P1 million to up to P10 million and removes the
sine qua non condition for the exemption or deduction, that the family home must have been the decedent's family
home as certified by the barangay captain of the locality;
▪Removes the deductions for nonresident estates pertaining to expenses, losses, indebtedness, and taxes but
provides for a standard deduction amounting to PhP500,000
▪Deletes the provision that requires executor, administrator or anyone of the heirs to include in the estate tax return
that part of the nonresident alien's grass estate not situated in the Philippines to be able to claim deductions
▪Increases the amount of gross value of estate provided in estate tax returns that requires to be supported with a
statement duly certified by a Certified Public Accountant (CPA) from P2 million to P5 million
Changes on administrative procedure:
● Filing of Death
Repeals the provision requiring the filing of notice of death of the decedent by his/her executor, administrator or
any of the legal heirs within two (2) months after the decedent's death.
● Deadline of Filing
Extends the period within which the estate tax return should be filed, from 6 months to 1 year from the decedent's
death.
● Payment on Installment Basis
Provides for the payment by installment basis in case available cash is insufficient to pay the estate tax due.
Payment shall be allowed within 2 years from the statutory date for itspayment without civil penalty and interest.
● Withdrawal Limit
Removes the P20,000 limit that may be withdrawn from the bank account of the decedent without certification
from the BIR and allows for the withdrawal of any amount but subject to a final withholding tax of 6%.

❖ CHANGES ON DONOR’S TAX

Change in Tax Rate


RA 10963 simplifies the donor’s tax schedule, from eight-bracket schedule with rates ranging from 2% to 15%, to
single rate of 6% of total gifts in excess of P250,000. The 6% tax rate likewise applies if the done is a stranger.

Other Changes:
o Inserts an additional provision under Section 100 of the NIRC of 1997, as amended, which provides that a
bona fide, at arm’s length and donative-intent free sale, exchange or other transfer of property made in the ordinary
course of business shall be considered as made for an adequate and full consideration in money or money’s worth and
is therefore not subject to the donor's tax.

o Deletes the provision exempting from the donor's tax dowries or gifts made by parents to each of their
legitimate, recognized natural, or adopted children on account of marriage.

❖ CHANGES ON VALUE ADDED TAX (VAT)


Broadening the VAT Base
-RA 10963 repeals the 54 provisions on VAT exemption and zero-rating under special laws to broaden the VAT
Base
-It also includes electric cooperatives in the definition of sale or exchange of services subject to VAT.

Withdrawal of Zero-Rated Transactions


-RA 10963 removes foreign currency denominated sales from VAT zero-rating and subjects to the VAT indirect
exporters and agents only upon the establishment and implementation of an enhanced VAT refund system.

Retention to VAT Exemptions


RA 10963 retains the VAT-exempt status of the following:
-Raw Agricultural & Marine Products
-Educational Services
-Health services
-Cooperatives
-Senior Citizens
-Person with Disabilities
Inclusion to VAT Exempt Transactions
-RA 10963 includes the following transactions to the list of VAT exempt transactions under Section 109 of the
NIRC of 1997:
-Sale of gold to the Bangko Sentral ng Pilipinas (BSP)
-Sale of drug and medicines prescribe for diabetes, high cholesterol and hypertension, beginning January 1, 2019
-Association dues, membership fees, and other assessments and charges collected by homeowners’ associations
and condominium corporations.
-Transfer of property in pursuance of a plan of merger or consolidation.

Adjustment to VAT Exempt Thresholds


-Increases the VAT-exempt threshold from P1,919,500 to P3 million which stop be adjusted to inflation not later
than January 31,2021 and every 3 years thereafter.
-Increases the present VAT-exempt threshold on lease of residential unit with a monthly rental of P12, 800 to
P15,000.
-Reduces the VAT-exempt threshold from P3,199,200 to P2,000,000 on sale of house and lot and other residential
dwellings beginning January 1, 2021.

❖ CHANGES ON EXCISE TAX ON (AUTOMOBILES)

Change in Tax Rate


RA 10963 restructures the tax schedule on the excise tax on automobiles by imposing ad valorem tax rates that are
directly applied to the net manufacturer’s price/importer’s selling price instead of imposing marginal tax rates, as
follows:

Old Tax Schedule New Tax Schedule

NOTES:
▪Hybrid vehicles or vehicles powered by electric energy in combination with gasoline, diesel or any other motive
power shall be subject to 50% of the applicable excise tax rates on automobiles.
▪Purely electric vehicles and pick-up trucks shall be exempt from excise tax on automobiles.
▪Pick-ups shall be considered as trucks.
▪The term "jeep" was deleted from the definition of jeep/jeepney/jeepney substitutes which shall now read as
jeepney/jeepney substitutes.

❖ CHANGES ON EXCISE TAX ON (PETROLEUM PRODUCTS)


RA 10963 increase the tax rates on petroleum products in three tranches beginning January 1, 2018 to January 1,
2022 as follows:

For the period 2018 to 2020, the scheduled increase in the excise tax on fuel shall be suspended when the average
Dubai crude oil price based on Mean of Platts Singapore (MOPS) for 3 months prior to the scheduled increase of the
month reaches or exceeds US$ 80 per barrel.

❖ EXCISE TAX ON SWEETENED BEVERAGES


o P 6.00 per liter of volume capacity
Tax on sweetened beverages using purely caloric sweeteners, and purely non-caloric sweeteners, or a mix of
caloric and non-caloric sweeteners.
o P 12.00 per liter of volume capacity
Tax on sweetened beverages using purely high fructose corn syrup or in combination with any caloric or
non-caloric sweetener.

Sweetened beverages using purely coconut sap sugar and purely steviol glycosides are exempt from this tax.

Beverages Covered:
-Sweetened Juice Drinks
-Energy & Sports Drinks
-Sweetened Tea
-Cereal & Grain Beverages
-Flavored Water
-All Carbonated Beverages
-Other Powdered Drinks not classified as Milk, Juice, Tea & Coffee
-Other non-alcoholic beverages, that contain added sugar
Beverages Excluded:
-All Milk Products, including Plain Milk, Infant Formula Milk, Powdered Milk, etc.
-Meal Replacement & Medically indicated Beverages.
-Ground Coffee, Instant Soluble Coffee, and Pre-packaged Powdered Coffee Products
-100% Natural Vegetable Juice
-100% Natural Fruit Juice

❖ CHANGES ON (OTHER EXCISE TAX)


▪On Cigarettes
RA 10963 increases the excise tax on cigarettes packed by hand and packed by machine, as follows:

▪On Mineral Products


RA 10963 increases the excise tax on domestic or imported coal and coke in 3 tranches beginning January 1, 2018
January 1, 2020 as follows:

❖ CHANGES ON DOCUMENTARY STAMP TAX


RA 10963 increases the DST rates by 100% except the DST on debt instruments (Section 179) which only
increases by 50% and the DST on policies of insurance upon property (Sec. 184), fidelity bonds and other insurance
(Sec. 185), indemnity bonds (Sec. 187), and deeds of sale, conveyances and donation of real property (Sec. 196)
which remained unchanged.

❖ CHANGES ON OTHER TAXES


FOREIGN CURRENCY DEPOSIT UNIT (FCDU)
RA10963 increases the final tax imposed on interest income derived by an individual (except a nonresident
individual) and a domestic corporation from a depository bank under the expanded foreign currency deposit system
from 7.5% to 15%, The law however, retains the 7.5% final tax on such interest income of a resident foreign
corporation

CAPITAL GAINS OF NON-TRADED STOCKS


RA 10965 increases the 5%-10% tax rates to a 15% single tax rate on net capital gains realized by an individual
and a domestic corporation from the sale, barter, exchange of other disposition of shares of stock in a domestic
corporation that not traded in the local stock exchange. The law, however, retains the 5%-10% capital gains tax of a
resident foreign corporation and nonresident foreign corporation.

STOCK TRANSACTIONS TAX (STT)


RA 10963 increases the STT from 0.5% to 0.06% of the gross selling price or gross value in money of the shares
of stock sold, bartered, exchanged or otherwise disposed through the local stock exchange.
COSMETIC PROCEDURES
RA 10965 levies a new excise tax equivalent to 5% of gross receipts, net of excise tax and VAT, derived from
performance of services on invasive cosmetic procedures, surgeries, and body enhancements directed solely towards
improving altering, or enhancing the patient’s appearance.

TAX ADMINISTRATION REFORMS UNDER TRAIN LAW

✔ Fuel Marking
Provides for fuel marking of petroleum products that are refined, manufactured, or imported into the Philippines,
and that are subject to the payment of taxes and duties and provides for the mechanism on how fuel marking will be
done including imposition of penalties for possible violations.

✔ Registry of Petroleum Manufacturers and Importers


Requires the DOF to maintain a registry of all petroleum manufacturers and/or importers and the articles
manufactured and/or imported by them including real-time inventory of such products in storage depots.

✔ Tax Incentive Report


Requires the submission by the Cooperative Development Authority to the BIR and DOF of a tax incentive report
which shall contain information on the income tax, VAT, and other tax incentives availed of by cooperatives enjoying
incentives under RA 6938, as amended.

✔ Income Tax Return


Sets the maximum number of pages of the income tax returns of individuals and corporations toa maximum of 4
pages, in paper or electronic form, and the
information that they should contain.

✔ VAT Refund Centers


Requires the establishment of VAT refund centers in the BIR and in the BOC and the earmarking of 5% of the taal
VAT collection for the purpose of funding clams for VAT refund.

✔ Zonal Values
Inserts a provision on the automatic adjustment of zonal values once every 3 years and the publication or posting
requirement in order for the said adjustment in zonal valuation to be valid.

✔ Sweetened Beverages
The Food and Drug Administration (FDA) shall require all manufacturers and importers of sweetened beverages
covered by the law to put the required labeling with unique identification of exciseable sweetened beverages,

✔ Audit Threshold
Provides for electronic sales reporting system for taxpayers engaged in the export of foods and services and Large
Taxpayers at their own expense within 5 years from the effectivity of the Act.

✔ Electronic Sale Reporting System


Increases the threshold amount required to be examined and audited by independent CPAS, from gross quarterly
sales, earnings, receipts or output of more than P150,000 to gross annual sales, earnings, receipts or output of more
than P3,000,000. It also removes the threshold before taxpayers are required to keep books of accounts.

✔ Electronic Receipts
Requires the issuance of electronic receipts of electronic sales/commercial invoices in lieu of the manual receipts
and sales/commercial invoices for taxpayers engaged in the export of goods and service, e-commerce and the Large
Taxpayers within 5 years from the effectivity of this Act and upon establishment of a system capable of storing and
processing the required data.

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